The Securities Appellate Tribunal (“SAT”) in its recent ruling¹ in the matter of Triumph International Finance India Limited v. SEBI² (“Triumph Case”) has set aside the order passed by the Adjudicating Officer of the SEBI (“Impugned Order”) and has held that close business relations between persons / parties cannot by themselves lead to a conclusion that such parties were acting in concert with each other for the purpose of acquisition of shares under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“Takeover Code”).

FACTS

Triumph International Finance India Limited (“Appellant”) along with five other companies i.e. Classic Credit Limited, Classic Share & Stock Broking Services Limited, Panther Fincap & Management Services Limited, Panther Investrade Limited and Triumph Securities Limited (“TSL”) being associated with the Ketan Parekh group (hereinafter collectively referred to as the “Other Acquirers”) had acquired substantial quantity of shares of Adani Exports Limited (“Target”) during the period from November 1999 to January 2001. The total acquisition of the Appellant and the Other Acquirers (collectively referred to as the “Acquirers”) had exceeded the limit of 5% of the share capital of the Target on six dates between July 1, 2000 and October 16, 2000, thereby triggering the disclosure requirements prescribed by Regulation 7³ of the Takeover Code, which the Acquirers failed to make. Accordingly, a show cause notice was issued to the Acquirers to which the Appellant filed a detailed reply. The Other Acquirers filed applications for a consent order and the proceedings qua them ended in a consent order. With respect to the Appellant, the Adjudicating Officer (“AO”) vide its order dated June 30, 2009⁴ found that the Acquirers were acting in concert with each other when they acquired the shares and since they failed to disclose their holdings to the Target, they violated Regulation 7 of the Takeover Code. The Appellant filed an appeal with the SAT. The fact that the Appellant had acquired the shares of the Target, which together with the shares acquired by the Other Acquirers exceeded 5% of the paid up share capital of the Target was not disputed. Further, there was no dispute that the total number of shares acquired only by the Appellant did not exceed the 5% of the paid up share capital of the Target.

ISSUE FOR CONSIDERATION

Whether the Appellant was a ‘person acting in concert’ (“PAC”) with the Other Acquirers when it acquired shares of the Target?

FINDINGS

In determining the aforesaid SAT explored the definition of PAC, which has been defined under Regulation 2(1)(e) of the Takeover Code to  comprise of persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company. Sub-section (2) of Regulation 2(1)(e) of the Takeover Code then gives a list of persons who shall be deemed to be acting in concert with each other unless the contrary is established.

Ø             NO COMMON OBJECTIVE

On a plain reading of the definition of a PAC it is clear that before two or more persons can be said to be acting in concert with each other they must have a common objective and that common objective should be substantial acquisition of shares or control over a company. The shares/control should then be acquired pursuant to an agreement or an understanding which could be formal or informal. These key elements were stressed upon by the SAT when it concluded that the same were missing in the show cause notice that was issued to the Appellant.

Ø            BASIS OF FINDINGS REVERSED IN AN APPEAL FILED BY THE APPELLANT IN ANOTHER MATTER

At the crux of the Impugned Order was the fact (arrived at by the AO) that the Appellant was a company controlled by Ketan Parekh (along with the Other Acquirers). SAT had in a prior matter namely, Triumph International Finance Limited v. SEBI⁵ whilst considered similar factshad held that the Appellant though a close associate of Ketan Parekh’s investment / broking companies, was not under the control per se of Ketan Parekh. For a better understanding the following table summarizes the contentions of the SEBI in the Impugned Order and the reasoning of the SAT for reversing SEBI’s contentions, based on inter-alia, the earlier appeal:

Ø            ASSOCIATION IS DIFFERENT FROM PAC

The SAT differentiated between a business association among persons and their acting in concert with a common objective to acquire substantial number of shares in a company in pursuance to an understanding or an agreement and held that a mere business association does not tantamount to acting in concert as contemplated under the Takeover Code. The SAT further stated that merely acting as a broker of a close associate was a ‘business association’ and such association cannot be construed to be a PAC.

ANALYSIS

The meaning of PAC has often been a bone of contention not only because of the ambiguities surrounding it which makes it prone to several interpretations but also because of the wide implications it can have for e.g. disclosure requirements, clubbing of shareholding, announcements, pricing of public offers, to name a few. Courts and the SAT in a plethora of judgments have held that to fall within the purview of PAC what is important is that the parties should have a common objective and that objective should be to acquire a substantial stake or control in the target company.

Although the aforementioned principle is easier to apply when parties are totally unrelated, vide this Triumph Case, the SAT has clarified that even if the parties are very closely related to each other, they may still be outside the ambit of PAC. There is something more than just business relations between the parties which needs to be proved.

- Deepak Jodhani, Simone Reis, Vaidhyanadhan Iyer and Nishchal Joshipura